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Is it time to act on the Rolls-Royce share price?

Image: Rolls-Royce

After a turbulent few months, the Rolls-Royce (LSE: RR) share price is back to where it started 2021. Over the past 12 months, the Rolls-Royce share price has increased 17%. But recently momentum has stalled.

Could that make now the time to act on the share price?

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Short-term travel prospects

A key determinant of the Rolls-Royce share price is how much its installed engines are used. The more flying hours they log, the greater the servicing need. Such maintenance forms a significant part of the company’s revenues.

I think the prospects are looking up. With travel restrictions lifting in countries that are vaccinating quickly, flying schedules are filling up again. So far in Europe, the pace is slower. But in the US, for example, carriers such as American Airlines plan summer domestic schedules at close to 2019 levels. Larger planes usually reserved for long-haul international flights are being used to add capacity on domestic routes by American and rival Delta. That suggests many passengers are keen to fly again.

Rolls-Royce has said that large engine flying hours in the first four months of the year were around 40% of normal levels, in line with its assumptions.

Cash flow shift

The company has repeatedly said that it expects to stop bleeding cash in the second half of this year. With its massive outflow in the past year, positive cash flow will be a big step forward in boosting investor confidence. That could be good for the Rolls-Royce share price.

At its annual shareholders’ general meeting today, the company reiterated this target. It said: “We continue to expect to turn free cash flow positive at some point during the second half of 2021, as engine flying activity recovers and cost savings are delivered.”

The company recognised that the target remains dependent on recovery timing. But the positive note could still bode well for the shares. With the second half starting barely a month-and-a-half from now, this target remaining in place suggests management confidence.

Defence and power

The company does more than just make and service civil aircraft engines.

The company described its power systems division performance so far this year as “on track” in its trading update. Additionally, the company said that its defence division has performed “resiliently”.

As investors become more comfortable about the outlook for civil engines, I expect them to focus more on the other divisions again. Given their comparatively stronger performance, that could lead to a positive re-rating for the shares.

Rolls-Royce share price risks

The timing of the recovery in flying hours remains critical to Rolls-Royce, so the longer it takes the bigger the risks to the company. That is outside the company’s control.

With a large fixed cost base, reduced flying hours don’t just hurt revenue, they also significantly cut profits.

What I’ll do about the share price

I see positive tailwinds for the company. The recent price fall could therefore make it more attractive for me to add Rolls-Royce to my portfolio.

However, I remain wary of the risks. The company continues to experience cash outflow. The pace of travel recovery remains hard to ascertain. For now at least, I will continue to watch the company from the sidelines without investing in it.

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christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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